Physical-to-Economic Occupancy Forecast
Use real-world usage to anticipate future rent and valuation losses
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 95%
Commercial leases can preserve reported rent long after employees stop using a building. Treat physical occupancy—such as anonymized swipe-card activity—as a leading indicator and economic occupancy, meaning rent actually paid, as a lagging indicator. Map lease expirations, estimate how much space each tenant will retain, and translate underutilization into prospective nonrenewals or smaller footprints. Account for peak-load behavior because organizations may still need enough space for popular attendance days even when average usage is low. Finally, analyze individual buildings rather than applying the market decline uniformly: premium properties may remain full while weaker assets approach zero demand. This converts observable behavior into a forward view of rent, vacancy, refinancing risk, and property value.
Origin
Extracted from Masters in Business during Sean Dobson's discussion of office usage and lease-renewal risk after 2021.
Core principles
- 01Physical usage leads contractual rent recognition.
- 02Long leases delay rather than eliminate demand changes.
- 03Renewal decisions reveal the economic effect of underused space.
- 04Aggregate declines distribute unevenly across individual assets.
How to run it
- 1
Observe Physical Usage
Collect reliable measures of how many people actually enter and use each property.
Pro tip Use multiple data sources because no occupancy dataset is perfect.
Watch out Paid rent can make a lightly used building appear healthy.
- 2
Map the Contractual Lag
Record lease expirations, renewal dates, break clauses, and tenant credit quality.
Pro tip Prioritize large tenants whose decisions materially alter the building.
Watch out High-credit tenants may continue paying for years before reducing space.
- 3
Estimate Required Space
Translate attendance patterns into future tenant space requirements, allowing for peak days.
Pro tip Model both average attendance and the busiest shared office day.
Watch out Do not assume space falls one-for-one with average utilization.
- 4
Forecast Economic Occupancy
Apply expected nonrenewals and footprint reductions as each lease expires.
Pro tip Run several behavior scenarios because return-to-office policies can change.
Watch out Straight-line extrapolation can overstate certainty.
- 5
Select Individual Assets
Evaluate location, quality, amenities, tenant mix, and replacement demand to identify likely winners and losers.
Pro tip Search for viable buildings whose prices already reflect severe distress.
Watch out A market-wide average can conceal assets heading either to full occupancy or near zero.
In the wild
Dobson observed that many markets were peaking near 50% physical occupancy even though contractual vacancy remained much lower. By projecting reduced renewals as leases expire, Amherst saw a path toward 30% to 40% financial vacancy while still distinguishing attractive buildings from obsolete ones.
→ The model supported selective bottom fishing rather than a blanket bet on office recovery.
Common mistakes
Trusting reported occupancy
Contractual rent can hide a structural decline in actual building use.
Applying one vacancy rate everywhere
Demand loss is uneven, so some buildings can remain healthy while others become functionally obsolete.
Ignoring peak attendance
Tenants may retain more space than average attendance implies because employees cluster on the same days.
Is it for you?
Best for
It is best for office lenders and investors assessing assets after a structural change in workplace behavior.
Not ideal for
It is not ideal for properties whose revenue is unrelated to tenant presence or whose usage data is unavailable.
From the transcript
“physical occupancy is the leading indicator to economic occupancy.”
“Economic occupancy is who's paying the rent”
“asset selection becomes incredibly important.”
From the episode
Sean Dobson on the US Real Estate Industry
Sean Dobson